The tax authority ruled that the mere intention to sell real estate in the future implies that the properties were acquired solely for resale purposes. The foundation argued otherwise, indicating that the main investment objective was long-term rental. The dispute highlights the importance of proper planning by family foundations to avoid a 25% tax burden.
The case concerned a family foundation with a single founder, whose main purpose was to accumulate and grow the wealth created by the founder. On October 1, 2024, the foundation signed preliminary agreements to acquire two residential units. The sellers committed to establishing separate ownership rights and transferring those rights to the foundation. These properties were acquired as part of an investment strategy, with the intent to rent them out to generate income. A potential sale was allowed, but only after a period of no less than ten years. The funds obtained from such a sale were to be used by the foundation for future investments.
Given this background, the applicant asked whether the family foundation could benefit from the exemption provided under Article 6(1)(25) of the CIT Act in relation to the disposal of the properties.
According to the applicant, the foundation should be eligible for the exemption, provided that its activity does not go beyond the scope permitted under Article 5 of the Family Foundation Act. That provision allows the disposal of assets as long as they were not acquired solely for resale. The applicant argued that since the properties were acquired for investment purposes and would be rented out to unrelated parties, it could not be concluded that the sole purpose of acquisition was resale. Furthermore, the fact that the foundation would hold and lease the properties for a minimum of ten years strengthened this position.
However, the tax authority took a different view. It acknowledged that asset disposal is permitted for family foundations only if the assets were not acquired exclusively for resale. Yet, the authority emphasized that the timing of the disposal is irrelevant. The very possibility of a future sale, as expressed by the foundation’s management, contradicted the long-term protection objective of a family foundation. The fact that the properties would be rented out before being sold was also deemed irrelevant, as the intent to sell at some point in the future had already been established.
In the authority’s view, this intention to sell—regardless of when it occurs—was enough to determine that the foundation’s primary purpose in acquiring the properties was resale. The 10-year lease was interpreted merely as a way to secure the foundation’s interests prior to the sale, not as a genuine method of managing the properties. Consequently, such a transaction was deemed impermissible under the Family Foundation Act and would be subject to a 25% CIT rate.
Given the approach of the tax authorities, it is crucial to exercise caution when drafting a family foundation’s statute. Its provisions must be carefully worded to avoid triggering unnecessary tax risks.